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Does gold act as a hedge against inflation in the UK? Evidence from a fractional cointegration approach over 1257 to 2016

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  • Aye, Goodness C.
  • Carcel, Hector
  • Gil-Alana, Luis A.
  • Gupta, Rangan

Abstract

This paper examines the inflation hedging ability of gold in the UK based on a fractional integration and cointegration framework. This gives more flexibility as it does not restrict the order of integration between zero and 1. Annual time series data covering 1257–2016 were used. We conducted both full sample and sub-sample analysis. Using the full sample, the findings shows that gold and retail price index (RPI) are both I(1). However, based on the sub-sample analyses, gold is I(1) for most sub-periods while RPI is mean reverting (d < 1) for most periods. However, both series exhibit the same degree of integration, I(1), during the last sub-sample, specifically between 1903 and 2016. We also find the existence of cointegration between gold and RPI but this is exclusively due to the data from the last century. It is therefore concluded that gold provides protection against inflation since its value would be maintained in the presence of inflation.

Suggested Citation

  • Aye, Goodness C. & Carcel, Hector & Gil-Alana, Luis A. & Gupta, Rangan, 2017. "Does gold act as a hedge against inflation in the UK? Evidence from a fractional cointegration approach over 1257 to 2016," Resources Policy, Elsevier, vol. 54(C), pages 53-57.
  • Handle: RePEc:eee:jrpoli:v:54:y:2017:i:c:p:53-57
    DOI: 10.1016/j.resourpol.2017.09.001
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    Cited by:

    1. Juncal Cunado & Luis A. Gil-Alana & Rangan Gupta, 2018. "Persistence in Trends and Cycles of Gold and Silver Prices: Evidence from Historical Data," Working Papers 201816, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Inflation; Gold price; Hedging; Fractional cointegration; Long memory;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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